Tuesday 24 January 2017

Tests show insurers have the reserves to handle industry risk

Published 12/01/2012 | 05:00

INSURANCE

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ALL of Ireland's major insurers passed a recent round of 'stress tests' that probed whether they were setting aside enough money to deal with rising claim costs and other adverse market developments.

The Central Bank's head of insurance supervision, Fiona Muldoon, confirmed the positive outcome in a wide-ranging interview, where she also vowed to review the slew of recently introduced insurance regulations to see how well they were working.

The insurance stress tests were kicked off in October, when the Central Bank wrote to all "high-impact" insurers and a handful of "medium-impact" ones and asked them to detail how they would cope with a variety of adverse scenarios.

The concept was similar to the stress tests the banks were subjected to, but the Central Bank did not set a target 'pass' mark for insurers. "The result of that was they were adequate, they passed our tolerance," Ms Muldoon said. "We were okay with the results."

She added, however, that the Central Bank would continue to monitor the reserves set aside by insurers to see if there were any "outliers" and to try to understand if there were reasons why they had been more aggressive or conservative than their peers.

Discretion

Insurers have vast discretion over the amount they set aside to cover future claims, since they are relying on a variety of their own assumptions about the frequency of claims, the cost of those claims and the rate the firms' assets grow at.

Firms have come under pressure to 'release' reserves in recent years, as this released money can be counted as profits that are much-needed in the current difficult market.

But if firms' reserves run too low, the company can collapse and policyholders can end up picking up the tab through the Insurance Compensation Fund.

As well as monitoring reserves, the Central Bank has also introduced a raft of new regulations in recent years. Ms Muldoon said she had already started talking to her staff about the need to review those rules.

"We need to be tracking how well it's working, how many exceptions we've had to allow for particular circumstances [and] whether it's working the way we intended it," she said.

"That's an important part of a mature debate with the industry, but you can't do that until you've lived with them."

Interview

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